License to Operate: Wall Street’s Check on America First Policy

On 12 May 2025, China and the United States released a joint statement that ended the recent escalation in tariffs. For 90 days each agreed to lower their tariffs by 115%. This only applies to import taxes imposed since 2 April 2025—all prior tariffs remain in force. China also agreed to suspend or remove “non-tariff countermeasures.”

The parties also announced the creation of “a mechanism to continue discussions about economic and trade relations.”

Financial markets roared with approval. The S&P 500 index rose 3.3% on 12 May. Cyclical stocks gained the most. The bellwether 10-year U.S. treasury yield rose 9 basis points. The 2-year yield rose too, interpreted widely as indicating lower risk of a U.S. recession and associated U.S. monetary policy relaxation. 

U.S. Treasury Secretary Bessent repeatedly stated that this deal demonstrated the U.S. had a process, a plan, and now a mechanism. He also stated that neither side wanted full decoupling. 

For his part, USTR Greer emphasised that the US trade deficit—which stood at $1.2trn in 2024—was a national emergency. He argued that this deficit had risen sharply in recent years and was driven by non-reciprocal trade. In a subtle note of discord, Secretary Bessent noted that currency valuation and the U.S. Federal deficit also determined the size of the U.S. trade deficit.

As to how the 90-day pause was to be used, both officials made two points. First, that negotiations should begin with China to open the latter’s economy by removing non-tariff measures.

Second, that the 91-page Phase I Deal agreed in January 2020 by the first Trump Administration was a good place to build upon. U.S. officials claimed that the 2020 Deal would have narrowed the trade deficit if only the Biden Administration had enforced it. Notably, it was the commitments by China to buy more U.S. goods—rather than the Phase I Deal’s obligation on non-tariff measures—that U.S. officials emphasised yesterday. 

Senior officials choose when to be specific. Yesterday, China and the United States were very specific about the size of the tariff reduction (115%) and about the length of the pause. The message was clear: the recent tariff escalation got out of hand and the broad-based decoupling it implies served neither America nor China’s interests. Although both economies will still be harmed, the risk of a recession in the USA is diminished and there is less of a cloud over the 16 million Chinese jobs that Goldman Sachs estimates depend on access to the U.S. market. 

Of course, in principle, the imposition of sky-high tariffs has been postponed for 90 days. However, the joint statement refers to “an initial period of 90 days,” allowing for extensions (not too dissimilar to the repeated extensions to the deadline for finalising the sale of TikTok.) Moreover, in a public statement yesterday, President Trump made clear that, while tariffs on Chinese imports could go up again if no deal was concluded with China, they would not rise to last month’s levels. “Peak tariffs are very much in the past” the Financial Times quotes one senior analyst as saying. Message received then. 

It seems Wall Street is untroubled by the lack of specificity about the “mechanism” that the joint statement referred to. Nor does the silence from the Chinese side about the topics for discussion appear to be a source of concern. Only pedantic trade policy analysts would point out that the joint statement refers to “discussions,” not to “negotiations.” There are no mentions in the joint statement to trade deficits, balanced trade, the Phase I Deal and negotiations on non-tariff barriers. All the latter elements were part of the U.S. official narrative—as far as I can tell from the Chinese reporting, they have no echo from Beijing. Perhaps none of this matters to financial investors because the working assumption of enough of them is that the 90-day pause will be extended—the tariff truce can go on and on.

USTR Greer’s remarks speak to the China Hawks and to the isolationists and protectionists in the United States. He emphasised that the U.S. trade deficit grew significantly during the Biden Administration. That part is true: the goods deficit widened $300 billion between 2020 and 2024 according to Department of Commerce data. 

What mars this narrative is that the bilateral trade deficit in goods with China shrank $12 billion between 2020 and 2024. Commerce data shows that, in fact, during the Biden Administration U.S. bilateral trade deficits worsened markedly with Canada, the EU, Mexico and Taiwan.  

Moreover, the bilateral trade deficit with China in 2024 ($295 billion) was the lowest since 2011. In fact, the combined bilateral trade deficits with China of the four-year Biden term was smaller than the comparable sum during the first Trump term. 

The argument that Beijing’s non-tariff measures are expanding the U.S. bilateral trade deficit in goods with China is hard to sustain if that deficit is actually falling. Worse, during the Biden term total U.S. exports to China totalled $600 billion; during the first Trump term they didn’t exceed $487 billion. Bottom line: Chinese non-tariff measures did not prevent U.S. exports rising over 23% between the last two Administrations.

Yesterday, U.S. officials mentioned the January 2020 Phase I Deal between China and the United States as a basis for their negotiations going forward. This accord has commitments from China to purchase specified US dollar values of agricultural and manufactured goods as well as commitments by China to reform certain policies.

On more than one occasion yesterday it was contended that the Chinese delegation told the Trump team that the Biden Administration did not enforce the Phase I deal. President Trump claimed that when he was in office, he made sure the Chinese stuck to the terms of the Phase I Deal.

To set the record straight, it is worth quoting from Chad Bown’s assessment of China’s additional purchases of American products during 2020: “For covered products, its imports from the United States were 42 percent lower than Phase One agreement commitment. Relying on US export data, China’s purchases were 41 percent lower. China’s purchases of covered products in 2020 did not even reach 2017 levels” (page 833).

Does this rewriting of history matter? Not really if the goal of U.S. officials was to signal to financial markets that the purpose of the 90-day pause was to negotiate another deal. Of course, the subtle message is that deals with the Chinese are possible and that this time is different. Wall Street needed reassurance, not details.

In addition to the sector-specific investigations that have resulted in high tariffs on certain sensitive sectors, Reciprocal Trade policy had an across-the-board base of 10% and then country-specific top-up rates dependent upon the size of the bilateral trade surplus with the United States.

On 9 April 2025, those top-up rates were suspended (the S&P500 index rose 9.5% that day having fallen 4.8% in the 24 hours of trading after 2 April 2025, “Liberation Day.”) Those top-rates bore no relation to trade policy of the U.S. trading partner. Moreover, despite the purported threat to U.S. national security posed by bilateral trade deficits, the Administration halved the computed rates of tariffs. Half measures are hard to square with taking the national security threat seriously. 

Some have contended that the top-up rates were a negotiating tactic to wrangle concessions out of trading partners. If the U.S.-UK Economic Prosperity Deal is anything to go by, even the Trump Administration expects little U.S. export gain. Plus, as noted, Wall Street cannot stomach such high tariffs because of the recession risk. 

What’s left of America First Trade Policy? So far, 2025 saw U.S. market access circumscribed for all trading partners and for China in particular. The 10% across-the-board import tariff increase and the 25% sectoral-specific tariffs are the new baseline. China has been hit with 30% higher import tariffs since Inauguration Day. Wall Street can tame the excesses of America First Trade policy, but it hasn’t taken away the Administration’s license to operate in trade policy—only Congress can do that.

Simon J. Evenett is Founder of the St. Gallen Endowment for Prosperity Through Trade, Professor of Geopolitics & Strategy at IMD Business School, and Co-Chair of the World Economic Forum’s Trade & Investment Council.